10.  The applicant bank was set up and acquired a banking licence in 1993. On 20 November 1997 its licence was revoked by the BNB and on 6 January 1998 it was put into compulsory liquidation (see paragraphs 20 and 27 below). On 20 April 2005 the bank was wound up and it was struck off the register of companies (see paragraph 37 below).
11.  On 27 March 1997 the BNB ruled that the applicant bank was insolvent.
12.  On 5 May 1997 the BNB lodged a petition with the Sofia City Court to wind up the applicant bank.
13.  In a decision of 15 May 1997 the BNB found that the overall amount of the applicant bank’s outstanding major loans was more than twenty times greater than the amount of its capital (including paid‑up capital and reserves), when the regulatory maximum was eight times. Considering that that situation put at risk the bank’s ability to operate and posed certain other problems with its financial standing, it decided to restrict the bank’s operations. In particular, it prohibited it from taking deposits, granting loans or other credit facilities, purchasing bills of exchange or promissory notes, entering into foreign‑currency or precious‑metals transactions, entering into deposit transactions, acting as a surety or guarantor or providing security to third parties, effecting non‑cash operations, clearing current accounts of third parties and conducting factoring transactions. The BNB also appointed a special administrator (see paragraph 49 below) to supervise the activities of the applicant bank and to verify whether it complied with the restrictions.
14.  On 23 September 1997 the Sofia City Court, finding that the BNB had yet to revoke the applicant bank’s licence, which was a precondition to making a winding-up order under the new Banks Act of 1997, discontinued the proceedings. Its decision was upheld by the Supreme Court of Cassation on 12 November 1997.
15.  In principle, it would have been possible to remedy the problems noted in the BNB’s decisions of 27 March and of 15 May 1997 (see paragraphs 11 and 13 above) by increasing the applicant bank’s capital.
16.  This appears to have been the reason why on 23 March 1997 the applicant bank’s general meeting of shareholders resolved to issue new shares up to an amount of 12,000,000,000 old Bulgarian levs (BGL)[1], to be subscribed by the shareholders. The resolution was registered by the Sofia City Court and took effect on 12 May 1997.
17.  Two of the applicant bank’s shareholders, TOO Royal Flash and OOO Rontadent Trade, subscribed the shares and, accordingly, became liable to pay for them. However, they sought to discharge this liability by other means. On 30 June and 7 and 29 August 1997 the two shareholders purchased, at a discount, debts due by the applicant bank to the BNB and several other banks and companies. By virtue of these debt assignments the applicant bank’s shareholders also became its creditors. They advised the applicant bank that they wished to set off their obligations to pay for their newly subscribed shares against the debts that the applicant bank now owed them. Accordingly, the applicant bank made entries in its accounts to effect the required set-offs.
18.  On 11 November 1997 the deputy‑governor of the BNB responsible for banking supervision, in whom the Central Bank’s powers under section 65 of the Banks Act of 1997 (see paragraph 48 below) were vested, directed the applicant bank to cancel the above‑mentioned entries in its accounts. She reasoned that the set-offs represented non‑cash consideration for the shares and that they had been effected in breach of sections 72 and 73 of the Trade Act of 1991 and of section 19(2)(5) of the Banks Act of 1997 (see paragraphs 70‑72 below). The deputy‑governor of the BNB also ordered the applicant bank to present to the BNB a rectified balance sheet showing the cancelling of the entries. The order was immediately enforceable and not subject to judicial review (see paragraph 56 below).
19.  In a subsequent decision of 20 November 1997 (see paragraph 20 below) the BNB appears to have considered that the set-offs were in fact a conversion of assets which could not improve the applicant bank’s financial situation.
20.  On 20 November 1997 the governor of the BNB, acting on a recommendation by the deputy‑governor responsible for banking supervision, revoked the applicant bank’s licence and appointed two special administrators to act in place of the applicant bank’s board of directors. The reasons for his decision were as follows:
“In its decision [of 27 March 1997] the BNB’s board of governors found that the [applicant bank] was insolvent and petitioned the court to put it in compulsory liquidation.
With a view to allowing the [applicant bank’s] managing bodies to improve its financial situation by increasing its capital and accumulating additional funds and thus allowing it to restore itself to a state of solvency, [the BNB’s] banking supervision department decided not to recommend the revocation of the bank’s licence on grounds of insolvency.
The analysis of the [applicant bank’s] financial situation as of 11 November 1997, carried out by [the BNB’s] banking supervision department, indicates that the bank’s capital has not been increased through the accumulation of additional funds, but mainly through the conversion of assets – a conversion which was, moreover, not carried out in the proper manner – which has not led to a substantial improvement in the bank’s financial situation.
The overall capital adequacy of the bank is negative – minus 16.74% –, and the valuation of the bank’s assets and liabilities, carried out in accordance with the BNB’s supervisory requirements and rules, indicates that the value of the bank’s liabilities exceeds the value of its assets by BGL 1,072,977,000. Moreover, the bank has failed for more than seven working days to pay a due debt of 437,975.65 United States dollars (USD) to the Commercial and Savings Bank AD (in liquidation). Because of all these facts the BNB’s deputy‑governor in charge of the banking supervision department has recommended that the bank’s licence be revoked by reason of insolvency.”
21.  The decision, a copy of which was sent to the applicant bank by fax on 20 November 1997 and later by a letter of 1 December 1997, which was received by the bank on 2 December 1997, stated that it was immediately enforceable and not subject to judicial review (see also paragraph 56 below). On 25 November 1997 it was published in the State Gazette.
22.  The applicant bank contended that the debt to which the BNB had referred in its decision had in fact been settled. In support of that assertion it presented a decision of 12 April 2001 of an enforcement judge at the Sofia District Court, which indicated that by 5 September 1997 the applicant bank had paid in full a debt to the Commercial and Savings Bank AD under a writ of execution. The applicant bank further claimed that the BNB had been informed of the payment of the debt through a report made by the applicant bank’s special administrator on 8 September 1997. The Government disputed the applicant bank’s contentions and said that the debt in fact remained unpaid, as the Sofia City Court had found in its judgment approving the list of agreed creditors’ claims in the liquidation proceedings (see paragraph 35 below). The parties also produced a number of other documents in corroboration of their assertions.
23.  The applicant bank further contended that its assets exceeded its liabilities, contrary to what the BNB had found in its decision. In particular, it had money in two accounts in banks in the United States of America. The Government disputed that statement. Both parties presented various documents in corroboration of their assertions.
24.  On 24 November 1997 the BNB filed with the Sofia City Court a petition to wind up the applicant bank. In the petition it repeated almost verbatim the findings it had made in its decision of 20 November 1997 (see paragraph 20 above).
25.  A hearing was held on 17 December 1997, at which the applicant bank was represented by the special administrators previously appointed by the BNB (see paragraph 20 above). A prosecutor from the Sofia City Prosecutor’s Office also took part in the proceedings, as mandated by former section 81 of the Banks Act of 1997 (see paragraph 61 below).
26.  Counsel instructed by the special administrators argued that there was no indication that the applicant bank’s liabilities exceeded its assets or that it had defaulted on a debt which had fallen due. This position was supported by the prosecutor, who also submitted that it was necessary to gather evidence on the applicant bank’s real financial situation.
27.  In a judgment of 6 January 1998 the Sofia City Court granted the BNB’s petition, declared the applicant bank insolvent, made an order for it to be wound up, divested its decision-making bodies of their powers and the bank of the right to administer its property, ordered the sale of its assets, and appointed liquidators. It found that the conditions for making a winding-up order – namely, that an order revoking the bank’s licence had been made and a copy of that order produced to the court – were satisfied. The Banks Act of 1997 gave the court limited jurisdiction in proceedings to wind up an insolvent bank. The only fact the court had to verify in such proceedings was whether the above two conditions were met. The judgment continued:
“...in view of the new procedure introduced by the Banks Act [of 1997], ... the objection ... that the BNB’s averment of [the applicant bank’s] insolvency is not supported by evidence is unfounded. Unlike the repealed Banks and Credit Business Act [of 1992], which provided that the BNB had to ... prove ... the bank’s insolvency, the new Banks Act [of 1997] does not contain such a requirement. Moreover, in section 79(1) and (3) of the Act the legislature has exhaustively specified the conditions for making a winding-up order [in respect of a bank] and the requirements that the BNB’s petition has to conform to. These boil down solely to indicating the grounds on which the bank’s licence has been revoked under section 21(2) of the Act.
The logical and comparative‑law construction of the above provisions ... leads to the categorical conclusion that the changes in the statutory regime of bank insolvency are aimed, on the one hand, at a significant reduction in the court’s jurisdiction, [and even] at taking away its power to determine whether the bank is insolvent, and, on the other hand, at empowering [the BNB] to determine that issue without being required to substantiate or prove its finding before the court...
An argument in favour of the above conclusion is section 21(5) of the Act, which expressly provides that the decision of [the BNB] to revoke a banking licence is not subject to judicial review. ... Gathering evidence relating to the ... insolvency of a bank would run counter to the above‑cited prohibition against judicial review.
In view of all this the court finds that all [the applicant bank’s] requests and objections ... contesting the BNB’s averments about its insolvency are inadmissible and cannot be examined. The same goes for the evidence presented by [the applicant bank]: even if it is admissible, it should not be taken into account, as it is absolutely irrelevant to the dispute at hand. The two above‑cited prerequisites – the order ... revoking the banking licence of [the applicant bank] and the production of a copy of that order to the court... – are sufficient for the resolution of this dispute.”
28.  As the judgment was immediately enforceable (see paragraph 64 below), it was considered that from that moment onwards the persons entitled in law to act on the applicant bank’s behalf were the court‑appointed liquidators. Accordingly, the liquidators represented the applicant bank in the ensuing stages of the proceedings.
29.  The liquidators did not appeal against the judgment, but the Sofia City Prosecutor’s Office did. It argued that the Sofia City Court had erred in not examining whether the applicant bank was in fact insolvent. It had thus turned the proceedings into a mere rubber-stamping of the BNB’s petition for an order winding up the applicant bank. Had the court taken the trouble to look at the actual circumstances, it would have found that the applicant bank had more than USD 3,000,000 in cash, as evidenced by a report drawn up by the BNB‑appointed special administrators. That fact raised the question whether the BNB’s finding that the value of the applicant bank’s liabilities exceeded the value of its assets was indeed true. Also, the BNB had not specified the amount or the date of maturity of the overdue debt the applicant bank was alleged to have failed to pay for more than seven working days. It was thus impossible to carry out an independent assessment of the veracity of its allegation. The Prosecutor’s Office presented an expert report according to which the applicant bank’s assets adequately covered its liabilities.
30.  In reply the BNB and the applicant bank’s liquidators argued that the appeal was unfounded.
31.  On 10 March 1998 a three‑member panel of the Supreme Court of Cassation upheld the Sofia City Court’s judgment. Although it held that it could independently establish the facts, without deferring to the BNB’s findings, it was of the view that the applicant bank was indeed insolvent. An analysis of the evidence showed that, according to the BNB’s deputy‑governor, the value of the applicant bank’s assets was BGL 8,391,953,000, and the value of its liabilities BGL 9,464,930,000. The difference between those figures was exactly the amount mentioned in the BNB’s decision and its ensuing winding-up petition. Turning to the other factual evidence of insolvency – the non‑payment of a due debt for more than seven working days – the court held that the applicant bank did in fact owe another bank more than USD 2,500,000 under a debt rescheduling agreement of 18 September 1997. No payments had been made in satisfaction of that debt. The applicant bank’s objection that it had not been able to make any payments because of the prohibition on non‑cash operations imposed on it by the BNB’s decision of 15 May 1997 (see paragraph 13 above) was unfounded. In any event, the reasons for non-payment were irrelevant, since inability, however caused, to pay a debt for more than seven working days was of itself sufficient for the court to find insolvency.
32.  The Chief Prosecutor’s Office filed a petition for review of the judgment of the three‑member panel.
33.  On 30 June 1998 a five‑member panel of the Supreme Court of Cassation dismissed that petition in the following terms:
“The first-instance court’s construction of the law – the Banking Act [of 1997] – is correct. The regime of bank insolvency is a lex specialis in relation to general commercial insolvency law ... In this context it has to be considered that the ... prerequisites for ... an order winding up a bank are governed not by the general rules of the Trade Act [of 1991], but by the special rules of the Banks Act [of 1997]... This is necessary because of the specific character of the banking business ... [Banks operate] predominantly with other people’s money, which necessitates compliance with strict requirements for capital adequacy, formation of provisions and ... liquidity. [The BNB monitors compliance with these requirements] as part of its function of banking supervision, with a view to preserving the stability of the banking system and achieving effective and enhanced protection of depositors. Because of this specificity proceedings to wind up banks are expedited, with a view to protecting the interests of the creditors of the insolvent bank.
...
The Sofia City Court correctly held that the soundness and the expediency of the BNB’s decision to revoke [the applicant bank’s] licence could not be reviewed by the court, because [the BNB has special powers] in discharging its banking supervisory duties. By virtue of section 82 of the Banking Act [of 1997] the court is bound by [the BNB’s] winding-up petition, if it meets the requirements of section 79(3) in conjunction with section 21(2). [T]he court does not carry out an additional examination of circumstances evidencing the insolvency of a bank. ... The BNB alone ... has the competence to determine extra-judicially whether the two grounds for [declaring a bank insolvent] exist. [This determination] is not subject to review by the court, which has no latitude in such proceedings. Once the BNB has established the insolvency of a bank before the winding-up procedure begins, the court may not reconsider the issue. It must only carry out a formal, ex facie verification of [the BNB]’s winding-up petition, without venturing into the substantive issues..., because it is the revocation of the licence itself that constitutes the ground for making a winding-up order. The court may only verify whether [the BNB]’s decision is void, but may not examine whether [the BNB’s] finding of insolvency is borne out by the facts...”
34.  Thereafter winding-up proceedings unfolded in respect of the applicant bank.
35.  In the course of those proceedings the applicant bank’s creditors, which included its three shareholders, submitted their proofs of debt to the bank’s liquidators. The liquidators examined the proofs and drew up a list of agreed claims. Two of the bank’s shareholders, TOO Royal Flash and OOO Rontadent Trade, and two other creditors made objections to the list, which the liquidators examined. The liquidators then transmitted the list to the Sofia City Court for approval. No objections to the list were made to the court, which approved it in a final judgment of 9 February 1999. On 7 December 2000 the liquidators tried to obtain a ruling that a debt to the Commercial and Savings Bank AD did not exist and that the underlying claim should accordingly be disallowed, but the Sofia City Court declared their request inadmissible in a decision of 23 January 2001, holding that no objections had been made to that claim at the appropriate time, and that the existence of the debt had therefore been conclusively established in its judgment of 9 February 1999, which was binding on the bank, its creditors and liquidators.
36.  On 10 October 2003 the applicant bank’s liquidators applied to the Bank Deposits Guarantee Fund (see paragraph 67 below) for permission to start negotiations with potential buyers for the purchase of the applicant bank’s entire undertaking. Permission was granted on 14 October 2003 and on 31 January 2005 the liquidators entered into a contract for the sale of the undertaking to the Central Cooperative Bank AD, with the latter agreeing to pay a purchase price of BGN 1 and the applicant bank’s creditors BGN 3,254,000 in satisfaction of their claims. The contract was approved by the Sofia City Court in a final judgment of 8 April 2005.
37.  In a final judgment of 20 April 2005 the same court, on an application by the applicant bank’s liquidators, brought the winding up to an end and ordered that the applicant bank be struck off the register of companies.
38.  On an unspecified date in 2002 one of the applicant bank’s shareholders, First Financial AD, lodged with the Supreme Administrative Court an application for judicial review of the BNB’s decision to revoke the bank’s licence. It argued that the decision was null and void. Later the chairman and vice‑chairman of the applicant bank’s board of directors, purporting to act on the bank’s behalf, requested leave to intervene in the proceedings.
39.  In a decision of 5 March 2002 a three‑member panel of the Supreme Administrative Court held that the applicant bank’s request to be allowed to intervene in the proceedings was inadmissible because it had been lodged by persons who no longer represented it. Following the winding-up order and by virtue of section 84(3) of the Banks Act of 1997, read in conjunction with section 658(1) of the Trade Act of 1991, the only persons with power to act on its behalf were the liquidators. The court went on to hold that First Financial AD’s application for judicial review of the BNB’s decision was inadmissible. Section 21(5) of the Banks Act of 1997 excluded decisions by the BNB to revoke a bank’s licence from the scope of judicial review. That provision was to be construed according to its plain meaning and was applicable regardless of whether the request was to annul the decision or to declare it null and void. Furthermore, First Financial AD had no standing to lodge an application for judicial review, because the BNB’s decision was addressed to the applicant bank, not to its shareholders.
40.  The chairman and the vice‑chairman of the applicant bank’s board of directors and First Financial AD appealed.
41.  In a decision of 10 April 2002 a five‑member panel of the Supreme Administrative Court declared the appeal by the chairman and vice‑chairman of the applicant bank’s board of directors inadmissible and First Financial AD’s appeal ill‑founded. It held that no appeal lay against the refusal to allow the applicant bank to intervene in the proceedings. It also held that the decision not to examine First Financial AD’s application for judicial review on the merits was correct. The prohibition of section 21(5) of the Banks Act of 1997 applied regardless of whether the request was to annul the BNB’s decision or to declare it null and void.
42.  In late 1997 the chairman and the vice‑chairman of the applicant bank’s board of directors complained to the prosecution authorities about the actions of the BNB’s deputy‑governor in charge of banking supervision who had made the order of 11 November 1997 and the recommendation to the governor of the Central Bank to revoke the applicant bank’s licence (see paragraphs 18 and 20 above). They argued that she had acted in excess of her powers with a view to causing damage to the applicant bank. On 8 June 1998 the Chief Prosecutor’s Office ordered a criminal investigation into the deputy‑governor’s actions. On 6 November 1998 she was charged with abuse of office. In the course of the investigation the prosecution authorities ordered expert reports on, inter alia, the issue of whether the applicant bank had been insolvent as of 20 November 1997. One of the experts answered that question in the affirmative, another answered it in the negative.
43.  One of the expert reports, drawn up on 7 April 1999, noted that a confidential agreement concluded in May 1997 between the International Monetary Fund (“the IMF”) and Bulgaria for the establishment of a currency board in the country stipulated that the right to appeal against the BNB’s decisions should be preserved, but should not hamper it in the performance of its banking supervisory functions. According to an opinion expressed by the IMF’s mission in Bulgaria, any successful appeal should only lead to an award of compensation, not to the invalidation of the BNB’s decision to close the bank. It appears to have been the view of the IMF’s mission in Bulgaria that the protracted process of judicial review of the BNB’s decisions and their possible invalidation would not be consistent with the effective process of banking supervision.
44.  On 23 April 1999 a prosecutor from the Supreme Cassation Prosecutor’s Office discontinued the proceedings, considering that the BNB’s deputy‑governor had acted lawfully and had not acted in abuse of office. On 11 March 2005 another prosecutor from the Supreme Cassation Prosecutor’s Office, acting on a complaint by the applicant bank’s shareholders, decided to reopen the investigation, which the Court understands is still pending.